Inflation in Peru: Read the Small Print

We hear that Peru’s headline inflation number in the first 11 months of 2007 is running at 3.08%. Now this might be a tad over the inflation target set by the country’s central bank (2% plus or minus one percentage point), but what with one thing and another it’s a good effort for 2007 and most analysts are currently lauding this figure. So it is a pity that the rate we are given is not true then, isn’t it?

In an excellent article published by renowned economist Professor Jürgen Schuldt of Lima’s Universidad de Pacifico, this table using Banco Central del Peru’s own figures (and reproduced here with English titling) caught the eye:


We see that Lima’s inflation rate, the one used by Peru’s central bank for its inflation targeting calculations, is indeed running at 3.08%. But by incorporating the regional urban inflation rates for all Peru and weighting them to population count, inflation is running at 50% more than the figure presented as ‘representative’ by the government. Although it must be mentioned that although the regional inflation figures are calculated for urban populations and headcounts here are for all population, be it urban or rural, there is little doubt that the figures shown here give us a closer measure of the real inflation rate.

Some of the problem is in the reporting, as newswires just take the Lima metropolitan figures as “Peru’s inflation rate”. Very few (with due credit to Reuters) explain that the headline figure is for the Lima metropolitan area only, but even then it is cast off as a side issue with no correlation to the higher rates in the rest of the country. However, most of the problem lies inside the counting system. It does beg the question as to why the rate incurred by 33.1% of Peru, which is also by coincidence the lowest regional rate in the country, is fed to us as “the inflation rate”. Why is it not of more concern to consider the 66.9% of Peruvians who do not live in the Lima/Callao conurbation? Why does the central bank assiduously collate regional inflation rates for each of the 25 departments and then ignore its own figures? Why doesn’t the central bank target inflation to a truly representative national rate? Even the ruling APRA party stronghold regions such as La Libertad are experiencing inflation at over 50% above the headline level, and when it comes to Peru’s second city Arequipa 8+% inflation basically cancels out the much feted headline GDP growth.

Although the real inflation rate may be somewhat buried in bureaucratic obfuscation, Peruvians themselves seem to be well aware of the situation. In a recent poll, there was a clear weighting of people in South and Central regions (corresponding to the worst black spots of Cusco, Arequipa Moquegua, Tacna, Pasco, Ica etc) that felt inflation was worse since García came to power.


However, we note that Lima/Callao scored better than any other region.

Ironically, in a recent TV interview the director of the polling company discounted his own survey, saying that the population has an “error of perception”. Regional inflation statistics suggest otherwise. The combination points to a citizenry that is highly perceptive of the current situation. Perhaps those errors of perception come not from the people but from those executives that seldom set foot outside the capital.

Peru is certainly not the only LatAm state that can be charged with massaging its macroeconomic figures. One need only consider what Argentines think of their “official” inflation rate. But when whole economic policies are based around figures that exclude the majority of Peru’s population, it is not surprising that the feeling of disenfranchisement in the provinces is growing and with it the puzzlement of foreign observers (“But they’re doing so well! Why should they be unhappy?”) when they hear about the latest round of strikes and social unrest. They would do well to read the small print.

3 Responses to "Inflation in Peru: Read the Small Print"

  1. Vitoria Saddi   December 18, 2007 at 6:23 pm

    Mark, This is very interesting. Really had no idea that Peru also underreported their inflation. It is really unbelivable that a country that is supposed to receive investment grade is still taming inflation data. We are all skeptical about the rating agencies but still! At least, in Argentina everyone knows that it is the gentleman (aka Nestor Kirchner) who sets the number. In Peru, it is probably Alan, or not?Great piece, thanks a lot.Vitoria

  2. RL   December 19, 2007 at 6:16 am

    Peru inflation data is inaccurate but to say Peru is taming or manipulating inflation as Argentina does is going way too far. It is worth mentioning that Peru uses Lima inflation data because is the only hole region where data is available. The other data refers only to urban areas where inflation is usually higher than in small urban or rural areas. Nevertheless I guess the real inflation is somewhere in between the 3,08 and 4,68, still a manageable number. That has nothing to do with Argentina where official data is elaborated n a very imaginative way and has little relation to the real number which most estimates put 7-12 points higher at around 15-20%.RL

  3. Vitoria Saddi   December 19, 2007 at 10:58 am

    Dear RL,Please take a look at the Reuters’ news about the Mark Turner’s piece in our site. Thanks,Vitoria…………..18Dec2007REUTERS-Peru central bank understates inflation, say critics By Terry Wade LIMA, Dec 18 (Reuters) – Peru’s central bank should change the inflation index it uses for setting interest rates to reflect life in the provinces, where voters are increasingly frustrated by spiking food costs, analysts said on Tuesday. The central bank treats the inflation index for metropolitan Lima, where a third of Peru’s population lives, as the official inflation rate for its inflation-targetting regime. However, the national rate is much higher, and in some provinces it is twice or three times as high as the one in Lima.In the 12 months through November, the national rate was 4.43 percent while the Lima prices rose 3.49 percent. Both numbers are calculated by the INEI, Peru’s statistics agency. The discrepancy, critics say, means that monetary policy in Peru is looser than it should be and helps explain why the government suffers from lower approval ratings in the provinces, where there tends to be less price stability and more social protests. “Evidently, recent price increases in cities have annoyed people. There is an almost perfect correlation between price increases and social protests,” said Jurgen Schuldt, professor of economics at the Universidad del Pacifico in Lima. “Obviously, if the central bank will miss its inflation target this year when it is using the Lima index, it would have an even harder time using an index that includes all cities in Peru,” he said. The central bank has raised its benchmark interest rate a couple of times this year to 5 percent, but inflation is still expected to surpass its target for 2007. The central bank’s inflation target is 2 percent, plus or minus a 1 percentage points tolerance band. This year inflation is widely expected to slightly breach 3 percent, the ceiling of the target, mainly because of higher prices for imports of food, which has a heavy weighting in the index. Voters in provinces have blamed the government of President Alan Garcia for the price increases, caused in part by transportation costs. In poll this month by Peru’s Catholic University, nearly 60 percent of voters in three regions outside of Lima said control over inflation has deteriorated since Garcia took office last year. An official at Peru’s central bank said it used the Lima index because there is a time lag for price indexes collected in the provinces, and because it thinks data in the Lima index is more accurate. In some cities, such as Arequipa, Cusco and Tumbes, inflation rose between 6 percent and 9 percent over the last 12 months, and analysts say the poor felt the price increases more because they tend to spend more of their income on food. Inflation for food nationally was 7.13 percent in the 12 months through November, 62 percent more than the broader inflation index. “When whole economic policies are based around figures that exclude the majority of Peru’s population, it is not surprising that the feeling of disenfranchisement is growing in the provinces,” said Mark Turner, Latin American equities analyst with Hallgarten & Co. (Additional reporting by Teresa Cespedes; Editing by Tom Hals) ((; +51 1 221 2130; Reuters